Some Thoughts on Fiat Money and Marxian Economics

In my “Introduction to Marx’s Law of Value” I talked about the concept of abstract labour as the universal substance of all social wealth. I then went on to discuss the “money commodity” along with the different expressions of exchange value. But nowadays we no longer use commodity money. If this is the case then do prices represent social labour, or is the circulation of commodities completely disconnected from the production of value?

Before I continue, I’d like to quote a relevant letter Marx wrote to Ludwig Kugelmann in 1868:

“The chatter about the need to prove the concept of value arises only from complete ignorance both of the subject under discussion and of the method of science. Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products.”

It is clear from this letter that “value” is labour expended towards societies reproduction represented concretely in the commodity. This means that while value exist prior to exchange as the capacity to perform useful labour, it is only realized through exchange in a commodity exchanging society.

I do not wish to get into the theories of price determination under modern fiat money. Rather, I’d like to quickly go over the conceptual framework required to build a theory. Often the argument is made that Marx did not think money could exist without being linked to a commodity. This is clearly not the case since we trade commodities using state-backed inconvertible fiat money.

So, how should we interpret Marx in this respect? We can either interpret him in two ways:

  • Money ceases to exist when money is no longer a commodity
  • Price determination in a Capitalist society works completely differently when money is inconvertible fiat as opposed to commodity money in terms of value

Really, it is irrelevant which way we choose to interpret him. Either way, we’re lead into a discussion about the function of a universally recognized claim on social labour regardless if it is the expenditure of social labour itself.

Marx did not think that prices hovered around exchange value except in a very general sense. Prices are decided on the firm level, and tend to hover around the cost price of production. So then what do I mean by “general sense”? It’s through competition and circulation that socially necessary labour time “comes into its own”, as Ernest Mandel says.

Let’s say we have a sector, X that contains firms A and B. The average productivity to produce 1 commodity is 10 hours. This 10 hours is the SNLT, and is represented by $10, or $1 =1 hour. A and B produce the same commodities, have the same organic composition of capital, the same rate of surplus value and the same rate of profit. If either A or B produces above this average productivity they will be able to price it below $10 while maintaining the same, or a higher rate of profit. The inverse is true if A or B produces below this average productivity. It’s in this general sense that the linkage between the level of technological development and SNLT affects the long term movements of the relative price of commodities.

So when gold is money, the long term movement of the absolute price level can be represented by the equation:

(P’)(Pg)/V = P, where P’ is the golden price of commodities, Pg is the price of gold, V is the velocity of money and P is the price level.

When gold is the money commodity, the price of gold in ounces is going to be linked to its SNLT. The money price of gold is going to affected by its SNLT. Therefore, the “baseline” for the price level of commodities is linked to the SNLT of gold.

When Marx talks about paper money, and coinage he is clear that convertible fiat money represents not only a claim on social labour, but concretely expended labour. This is because it represents a quantity of gold. So what happens when money is no longer a commodity? While a commodity may retain its social significance as “money” (as evidenced by the rapid increase in the price of gold during times of crisis), gold becomes just like any other commodity. Inconvertible fiat is not concrete labour, and thus not abstract labour nor value.

But if fiat money is not itself social labour, do struggles like the fight over higher wages still matter? I would argue, yes. Though fiat is not itself social labour, as long as the economy functions properly, it retains a very important characteristic of commodity money – it is recognized as a universal medium of exchange. In this sense, fiat money represents a claim on social labour. Though the relationship between inflation, the quantity of money and the price level is separate from value production. The “baseline” for price level determination is no longer linked to a commodity. This means that the answer to our original question is: “yes and no”.

However, as long as the laws of competition persist SNLT remains a factor in price determination. Let’s return to our earlier example. But now for further clarification, we will add that A and B also use the same materials, and the price of the materials does not change. Performing above or below the average productivity of 10 hours gives us the same result.

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